Friday, 29 June 2012

The slick cityscape graphic playing on the
screens --- depicting sailboats catching the wind on a grass-lined canal; and
broad, orderly roads lined by glass and steel buildings --- was a world away
from the grim, gritty reality of Kabul today. But this was the future envisaged
by the Afghan government today at the Delhi Investment Summit on Afghanistan,
the first concerted attempt to lure foreign investors to that country.

For a decade now, starting from the 2002
Tokyo Donors’ Conference held in the wake of the Taliban’s ouster from Kabul,
the international community has passed the hat around for the expenses of
running a country with practically no source of income. Next month, the hat
will be passed around again at Tokyo to meet the commitments of last month’s
NATO conference in Chicago, where the international community pledged its
support for another decade.

But after 2024, Afghanistan might well have
to pay its own bills. And to get its economy rolling, Kabul is flaunting its
natural resources, its hardworking people, and a strategic geography that makes
it a land bridge between south and central Asia.

India is playing an anchor role in
supporting Kabul’s outreach. New Delhi policymakers worry that the drawdown of
NATO forces by 2014 would leave, in the words of Foreign Minister SM Krishna
today, “a political or security vacuum that will be filled by extremists once
again.”

New Delhi believes that only a rejuvenated
economy and accelerated job creation can stave off serious instability, even
civil war. Said Krishna, while inaugurating today’s summit: “Let the grey suits
of company executives take the place of olive green or desert brown fatigues of
soldiers; and CEOs, the place of generals.”

But there was clear apprehension amongst
the approximately 150 Indian, 85 Afghan, and 70 foreign companies and
organisations at the summit, that Afghanistan’s troubled security landscape is
hardly congenial for business investments.

Each of the four senior Afghan ministers
who spoke tried to allay those fears, arguing that a minimum level of security
already existed, which would greatly improve once the domestic economy picked
up steam.

“I would like to assure you that most parts
of Afghanistan are stable and secure. Almost everywhere the level of security
is well above that which is needed for economic development to occur. We are well underway towards creating a
virtuous cycle in which growth strengthens stability and the increased security
leads to further growth,” said Anwar-ul-Haq Ahady, the Afghan Minister for
Commerce and Industry.

Said Afghan foreign minister, Zalmai
Rassoul: “While it is true that there are certain areas in Afghanistan where
the security situation is not ideal, we should remember that these areas
represent a small part of the country.”

Besides security, Afghan ministers talked
up Afghanistan’s business climate, where Kabul has created a “liberal, legal
regulatory regime.” Investors would benefit from a financial investment law
based on “international best practices”, the lowest tax rates in the region,
100% foreign ownership of companies and cheap and plentiful labour.

However, corruption remains an investor
concern. Afghanistan has consistently scored low on the World Bank’s Doing
Business Indicator (DBI). It is also at No.2 in the corruption index of
Transparency International.

India has provided Kabul with $2 billion in
development aid, making it Afghanistan’s biggest regional donor. Private sector
investment, however, has been low at just $25 million, of which only 16% has
been in the job-creating manufacturing sector. This is set to change; last
year, a seven-company, SAIL-led consortium, named Afisco (Afghan Iron and Steel
Consortium) won a contract to develop
Afghanistan’s Hajigak iron ore deposits. This is expected to generate $12-14
billion worth of investment, including the setting up of a steel plant, a
coal-fired power plant and a hundreds of kilometres of railway lines.

The extraction of minerals is a key element
of Afghanistan’s plan for self-sufficiency. Minister for Mines, Wahidullah
Shahrani said that revenues from mining would comprise 45% of Afghanistan’s GDP
by 2025.

Besides mining, Afghan officials made a
plug for investment in the sectors of power transmission; hydroelectric power
generation; infrastructure development, agri-based industry; education and
healthcare.

According to the World Bank, Afghanistan’s
economy will grow at 4.9% annually between now and 2025; this could increase to
almost 7% with enhanced progress in agriculture and resources.

Indian foreign ministry officials say that
the outcome of the Delhi Investment Summit would play a role in the outcome of
the Tokyo Donors’ Conference on July 8th, where Kabul will present
an economic roadmap, entitled “Path to Self Reliance”.

The SEP infantry combat vehicle developed by BAE Systems' Swedish arm for potential users. The FICV will be larger, more lethal and able to swim, something that no contemporary ICV does other than the Indian Army's BMP-2

By Ajai Shukla

Business Standard, 28th June 12

Last week, the MoD flagged off India’s
first competitive development of a major military system, the high tech
Tactical Communications System. Now all eyes are on the second, with the MoD
finalizing the two winners in the four-cornered contest to develop a Future
Infantry Combat Vehicle (FICV) for the army. While figures are tentative, this
is by far India’s biggest-ever land systems contract, the Rs 50-60,000 crore
production of 2600 FICVs to replace the army’s venerable Russian BMP-2.

Of the four contestants that submitted
proposals to the MoD in Oct 2010 --- Tata Motors; the Mahindra Group; L&T;
and the MoD-owned Ordnance Factory Board (OFB) --- the MoD will select two as
“Development Agencies,” or DAs, who will each design and build a prototype of
the futuristic vehicle. The better one will be selected as the final FICV
design, which will go into production.

The MoD is pursuing this project under the
“Make” procedure of the Defence Procurement Procedure of 2008 (DPP-2008), under
which Indian vendors develop major defence platforms. The MoD funds 80% of the
cost of developing a prototype that must be at least 30% indigenous; the Indian
DAs pays the remaining 20%.

The FICV will be a tracked, lightly
armoured, off-road vehicle that can zoom over sand dunes or across a river.
Operated by a three-man crew --- a commander, a driver and a gunner --- it will
also carry seven fully equipped infantrymen into battle protecting them while
they are aboard from bullets and shrapnel. The FICV’s strike power --- an
anti-tank missile; a rapid-fire cannon; a 7.62 mm machine gun; and a grenade
launcher --- will enable it to destroy enemy tanks, ICVs, missile carriers,
attack helicopters and infantry.

“The FICV will be a 22-24 tonne vehicle
with the strike power of a 45 tonne main battle tank (MBT),” predicts Brigadier
(Retd) Khutab Hai, who heads the defence business of the Mahindra Group.

The army’s insistence on an amphibious FICV
constitutes a key design challenge. The generals believe an ability to quickly
swim across rivers would be a battle-winning ability in the riverine Punjab
plains. The BMP-2, its current ICV, is fully amphibious. But not since the
Soviet Union days has any army inducted a fully amphibious ICV.

Since Oct 09, when the MoD approved the
FICV project, private sector aspirants like the Mahindras, Tata Motors and
L&T have put in place the designers and technical facilities needed for developing
the complex FICV in the MoD’s tight timeframes. Now there is concern that, 20
months after submitting their project proposals to the MoD in Oct 2010, the
winning proposals have not yet been announced. According to the MoD’s own
timelines, this evaluation should have been completed in 8 months.

“The Mahindra Group has invested Rs 30
crore in putting together our FICV team. For two years, we have trained our
people, working with our technology partners, BAE Systems, in Sweden; and
Rafael in Israel. We are looking for an early decision from the MoD. Keeping
this team idle costs us money,” says Brig Hai.

Business Standard visited the Mahindra
Group’s facility in Palwal, Haryana, where its joint venture company, Defence
Land Systems India (Mahindra, 74%: BAE Systems 26%), has set up a high-tech
Systems Integration Laboratory that will spearhead the FICV design process.

L&T, too, hopes for an early decision.
It has set up a design facility at Talegaon, and tied up with technology
partners like CMI of Belgium. Interestingly, L&T is looking to Indian
company, Ashok Leyland, to play a role in the automotive aspects of the FICV.
“L&T’s design strengths are well known. Many hours of skilled engineering
have gone into the innovative design that we have presented to the MoD,” says
MV Kotwal, L&T’s heavy engineering chief.

Meanwhile, uncertainty clouds the Tata’s
proposal, which has German giant, Rheinmetall, as a technology partner. MoD
sources say that at least one of Tata’s rivals has objected, pointing out that
the CBI is investigating Rheinmetall Air Defence for allegedly bribing former
Ordnance Factory Board chairman, Sudipta Ghosh. It is unclear whether the MoD’s
delay in finalising the DAs for the FICV is related to this.

The MoD has not responded to an emailed
query from Business Standard on this question?

The MoD says that programmes like the FICV,
under the “Make” category of the DPP, will be key to developing India’s private
defence industry. Vivek Rae, the MoD’s procurement chief, stated during the Defexpo
2012 international defence exhibition in New Delhi in March, that the MoD would
soon announce many more “Make” projects.

“There will be a list of 150-180 ‘Make’
projects that (the MoD) will put on the web. With Indian companies tying up
with one another and competing, I think we could energise the industrial base
of the country. The sheer act of design and development, sharing of risks and
sharing of costs (in an 80:20 ratio) will be a very significant move forward,”
said Rae.

Tuesday, 26 June 2012

With
the Defence Ministry (MoD) poised to revise the defence offsets policy, India’s
defence industry fears a comprehensive dilution of the original intent of
offsets, which was to impel foreign arms vendors towards sourcing defence goods
and services from India. The global arms industry, backed in many cases by
their respective governments, has lobbied since 2006 for relaxing offset
conditions.

But
offset rules, it would now appear, have existed mainly on paper. MoD whistleblowers
have given Business Standard multiple examples of how the ministry
systematically flouts its own offset policy, irregularly clearing offset
contracts that violate guidelines. In each case, a foreign arms vendor has
benefited, while Indian industry has lost out.

The
more flagrant violations relate to:

1.
Offsets worth Rs 1,100 crore arising from the Rs 3,700 crore purchase from
Italy’s Finmeccanica group, of twelve AW-101 helicopters for Indian VVIPs like
the PM and the president. (The Italian police are separately investigating
bribery allegations in this deal. Finmeccanica denies irregular conduct, while
admitted that sacked former chairman, Lorenzo Borgogni, illegally transferred
“millions of Euros” in consultancy fees). In New Delhi, the Prime Minister’s
Office zoomed this procurement through the MoD, despite protests from sections
of the IAF and the MoD that these were civilian helicopters that the IAF
happens to operate. But even while treating this as a military purchase, the
offsets flagrantly violate the Defence Procurement Policy guidelines, granting
Finmeccanica offset credits for expenses relating to travel, accommodation and
allowances for project committee meetings and steering committee meetings. The
rules do not allow for this, since such offsets do nothing for indigenous
defence production capability. Neither Finmeccanica, nor the MoD, have
responded to an emailed request for comments.

2.
Offsets worth Rs 1,485 crore arising from the Rs 4,950 crore purchase of eighty
Mi-17V5 medium lift helicopters from Russia’s Rosoboronexport Ltd, Moscow’s
arms export arm. In violation of the DPP, the IAF (rather than an Indian
company) has been designated as the Indian Offset Partner (IOP), through which
Rosoboronexport will discharge offset obligations. Instead, offset proposals
involve training the IAF’s Base Repair Depots in issues like spares management.
The MoD legitimised this belatedly in 2009, rewriting the regulations to permit
IAF depots to be IOPs “on a case to case basis in consultation with DDP
(Department of Defence Production).”

“What
benefit has this brought to India’s manufacturing capability?” asks the CEO of
a defence manufacturing company. Neither the Russian Embassy in New Delhi, nor
the MoD, has responded to an emailed request for comments.

3.
Offsets worth Rs 1,233 crore relating to the Rs 3,856 crore contract with
Rosoboronexport to upgrade the IAF’s fleet of 62 MiG-29 fighters. Described by
MoD officials as “a double whammy,” the contract stipulates that all but the first
six MiG-29s would be upgraded in India by Hindustan Aeronautics Ltd; and
Rosoboronexport priced the deal accordingly, including technology transfer
costs and license fees. Inexplicably, the vendor was also granted offset
credits for the work that would be done in HAL, benefiting twice over.
Furthermore, offset credits were given for IAF pilot training, which the rules
only permitted from 1st Jan 2011. MoD sources confirm that no waiver
was granted for allowing training as offsets.

Neither
the Russian embassy, nor MoD has responded to an emailed request for comments.

4.
Offsets worth Rs 240 crore for a Rs 800 crore contract with Italian
shipbuilder, Fincantieri, for a fleet tanker that will replenish Indian Navy
warships on long patrols. The MoD’s tender specified certain “buyer nominated
equipment,” or BNE, which Fincantieri would be required to source from Indian
defence manufacturers. This included engines from Wartsila India; a combat
system from Bharat Electronics Ltd; an AK-630 gun from the Ordnance Factory
Board; and several other components. Fincantieri quoted accordingly, factoring
in the cost of building components in India. But then, again providing a double
benefit, Fincantieri was also granted offset credits for the BNE that was
sourced from India.

The
benefit to Fincantieri, by the ministry’s own measure, would be more than Rs
100 crore. The MoD’s Director General of Acquisitions, Vivek Rae, publicly
estimated at a seminar in New Delhi last July that global vendors add 13% to
the contract price where offsets are imposed. Fincantieri apparently obtained
that benefit despite having factored in the cost of BNE into its quote. Neither
Fincantieri, nor the MoD, has responded to an emailed request for comments.

Business
Standard has earlier reported on serial irregularities in offset contracts. US
company Lockheed Martin’s $275 million offset contract, which related to
India’s purchase of six C-130J Super Hercules aircraft flouted the offset
regulations blatantly, offering little, if anything, to Indian industry. (“Lockheed
offsets mock MoD norms”, 9th Dec 2010). Similarly, French company, Thales, was
allowed to get away with providing 100 cc motorcycles, domestic
air-conditioners, bicycles, cars, shelters, etc in its fulfillment of Rs 171
crore worth of offsets related to the Rs 570 crore sale of Low Level
Transportable Radars (LLTR) to the MoD.

The
defence offset policy compels global vendors who win defence contracts worth Rs 300 crore or more to
invest at least 30% of the contract value into India’s defence industry. From
2011 onwards vendors can discharge offset liabilities in civil aerospace and
internal security as well.

“The MoD
allows vendors to wriggle out of useful offsets. The primary job of the
Acquisitions Wing is timely procurement, not developing India’s defence
industry. It views offsets as an inconvenient hurdle to procurement, a box that
must be ticked. The result is that vendors get away with sub-standard proposals
that do nothing to build indigenous capability,” points out Maj Gen (Retd)
Mrinal Suman, an expert on offsets who has worked in the Acquisitions Wing.

The defence ministry (MoD) is waiting for a
suitable moment to promulgate a new round of revisions to the defence offset
guidelines. Several changes were finalised back in April, but an announcement
has been stalled by disagreement over a crucial question: who in the MoD should
handle offsets? Some officials argue that offsets should be under the
Acquisitions Wing, the MoD’s nodal point for all procurement, since offsets are
a part of procurement too. Others say that the Department of Defence Production
(DDP) must oversee offsets, which are designed to stimulate domestic defence
production.

For the uninitiated, the MoD’s offset policy is a form of
counter-trade, which compels global vendors who win Indian defence contracts
worth Rs 300 crore or more to source 30% of the contract value from Indian
defence industry, or invest an equivalent amount into Indian R&D. Since
2011, offset liabilities can also be discharged in the fields of civil
aerospace and internal security.

This question of responsibility remains
unsettled even after six years of desultory internal debate. With Defence
Minister AK Antony keen on releasing a single comprehensive revision to the
offset guidelines, even the policy amendments that enjoy broad-based support
are on hold. These are: permitting transfer of technology (ToT) as offsets;
allowing credit multipliers of up to 300% for specified technologies that
vendors transfer to the Defence R&D Organisation (DRDO); extending by two
years the period within which vendors must discharge offset obligations; and
extending the validity of banked offset credits to seven years (it was earlier
two years).

Also in the pipeline is a vital piece of
clarity that Broadsword has long argued for: an explicit enunciation of the
objectives of the defence offset policy. I hear that the MoD will announce a
threefold objective “to leverage capital acquisitions to develop Indian defence
industry by (i) fostering development of internationally competitive
enterprises, (ii) augmenting capacity for Research, Design and Development
related to defence products and services and (iii) encourage development of
synergistic sectors like civil aerospace and internal security.”

Such a clear aim --- “to develop Indian defence
industry” --- is crucial. It is the absence of such clarity that has
facilitated a raft of misdirected and perverse offset contracts for VVIP
helicopters; Mi-17V5 helicopters; MiG-29 fighters upgrade; fleet tanker; C-130J
Super Hercules aircraft; and the Low Level Transportable Radar that are listed
in today’s Business Standard. None of those offsets develop Indian defence
industry in any way. Instead they are cozy arrangements between our military
and the vendor, which pay lip service to offsets while quickly handing the
former its toys and the latter its inflated profits.

As
important as a clear aim is the need to thrust upon the DDP a major role in
implementing offsets. As perceptive observers note, the Acquisitions Wing
focuses on timely procurement, with no mandate or mind space for developing
indigenous defence industry. Even with an honest director, the Acquisitions
Wing is institutionally geared to view offsets as a hurdle to procurement, a
box that must be ticked before the contract is signed. With an equipment-hungry
army and air force backing token offsets (such as “donations” of training
simulators by the vendor), the Acquisitions Wing sees no moral conflict in
disregarding indigenous defence industry.

Convenient
arguments are also marshaled by foreign vendors who
tell the Acquisitions Wing that India’s domestic defence industry is incapable
of absorbing the deluge of offsets that lies ahead! This despite the fact that India exported over $60 billion
(Rs 3,40,000 crore) worth of engineered goods last year to the US alone.

Even assuming (for the sake of argument)
that Indian manufacturing industry was incapable of producing defence-standard
equipment, it is the vendor’s responsibility to identify and develop local
partners, handhold them in developing their production techniques, and
eventually integrate them into his own global supply chain.

That having been said, it is equally
essential for the currently toothless DOFA (or Defence Offset Facilitation
Agency, a DDP department that is tasked to connect vendors with Indian industry)
to become more proactive. DOFA must map the indigenous defence industry,
updating its data regularly, and presenting overseas vendors with an indigenous
capability matrix that would facilitate them in choosing an Indian Offset
Partner (IOP).

Ideally, a more pro-active and less
paranoid MoD would be actively connecting indigenous private defence companies,
particularly SMEs, with foreign technology partners in order to develop them
through offsets into high-tech powerhouses. But, in the climate of caution and
apprehension that characterises the Antony MoD this might seem like a rash
invitation to a CBI tea party. However, this is what the DDP does, 365 days a
year, for its defence PSUs. All that is needed is the realization that all
defence producers, from both the public and private sectors, fall under the
DDP.

Thursday, 21 June 2012

Last year, the MAFI contract (see my story, above)... now the TCS development. The private sector finally has its foot in the defense production door. Now let's see it deliver.

by Ajai Shukla

Business Standard, 21st Jun 12

In a long-anticipated move towards unleashing the abilities of India's private sector in equipping the military, the ministry of defence (MoD) has chosen a private sector consortium to compete with Bharat Electronics Ltd (BEL), the public sector giant, to develop a backbone communications network for the 21st century battlefield. The project is worth an estimated Rs 10,000 crore.

Called the Tactical Communications System (TCS), this network will be created simultaneously by two Indian ‘development agencies', or DAs. Besides BEL, the MoD's traditional go-to shop for electronics and communications, South Block has selected a private sector consortium of Larsen & Toubro, Tata Power (Special Electronics Division) and HCL. The MoD today informed the two DAs in writing about their selection. Business Standard has reviewed a copy of the MoD letter.

The TCS is a mobile communications grid that is rolled out across the battlefield, even deep inside enemy territory, for advancing tank formations. Each TCS provides an army corps (some 60,000 soldiers) with the frequencies and bandwidth needed for its communications, including voice, data and video.

It operates like a cellular phone network, but with three major differences. First, the TCS is mobile, its exchanges and switches installed in high-mobility vehicles that can transport and install these anywhere, including mountains and deserts. Second, the TCS transmits enormous volumes of data, such as map overlays, video conferencing or streaming video from unmanned aerial vehicles. Finally, the TCS maintains secrecy, forestalling enemy eavesdropping by rapidly hopping frequencies, hundreds of times a second, in a coded sequence.

Given the importance of secrecy, the MoD ruled that the TCS must be built in India. It is the first project being taken up under the ‘Make' category of the Defence Procurement Policy of 2008 (DPP-2008). This mandates that an Indian company, or consortium, must develop the TCS, with a minimum 30 per cent indigenisation at the prototype stage.

The two DAs will now take about six months to prepare a Detailed Project Report (DPR). This will define every system, sub-system, and capability of the TCS network. After studying the DPR, the MoD will estimate the cost of developing a TCS prototype. Industry sources say a working TCS prototype for an army division (15,000 troops) could cost about Rs 300 crore. MoD will fund 80 per cent of this cost; the vendors will pay 20 per cent.

The next crucial stage, explains Rahul Chaudhary, CEO of Tata Power (SED), is the building of the TCS prototype, which the two contending DAs would do separately, taking some 18 months. Then, in six to eight months of user evaluation trials, MoD will choose the better design. The DA that indigenises technology better will have an advantage over the one that relies more on foreign technologies and components.

The trials would also give the user a last chance to recommend design changes. The finalised design, to be documented into a General Staff Qualitative Requirement (GSQR), will be the TCS that enters operational service. The government could nominate a single winning vendor —between BEL and the L & T-led Special Purpose Company (SPC) — to build all seven TCS systems the army needs, each worth some Rs 1,500 crore. However, most insiders expect MoD would speed up production and hedge risks by distributing the order 65:35, with the superior design getting the lion's share.

In choosing the two DAs that were intimated today, MoD evaluated eight carefully vetted companies: L & T, Tata Power (SED), HCL, Rolta, Wipro; and also from PSUs: BEL, Electronics Corporation of India Ltd and ITI. Given the complexity of the projects and the stakes involved, L & T, Tata Power (SED) and HCL decided to combine forces, bidding jointly as an SPC.

Jayant Patil, executive vice-president at L & T, told Business Standard at Defexpo India 2012 in March that the distribution of stakes in the SPC are: L & T, 56.67 per cent; Tata Power (SED), 33.33 per cent; and HCL 10 per cent.

Monday, 18 June 2012

The ministry of defence (MoD) is poised to sharply dilute its Defence Offset
Guidelines (DoG) during the coming fortnight.

MoD and industry sources tell Business Standard that among the amendments the
apex Defence Acquisition Council (DAC) is to clear on June 24 is one that would
allow foreign vendors to discharge their offset obligations with minimal
production and value addition in India.

While some of the likely amendments to the DoG are broadly acceptable, a
controversial new proposal has set alarm bells ringing among Indian defence
producers. This innocuous, but far-reaching, amendment relates to how ‘value
addition’ will be calculated when an Indian Offset Partner (IOP) produces a
system or a sub-system for a foreign vendor (offset credit is only given for
value addition in India). Imported items have always been excluded from the
‘value add’, calculated as the IOP’s billed cost for the equipment supplied to
the foreign vendor, less the cost of imported items used by the IOP. The
proposed amendment would allow the IOP to buy foreign parts from Indian
sub-vendors, and present that as value-add, provided the sub-vendor is paid in
rupees.

Illustration

In practice, here’s how this would work.
Consider a hypothetical offset-related contract that a foreign vendor, Smith
Aerospace, signs with an IOP, Jai Bhagwan Hydraulics. If Jai Bhagwan uses Rs 80
crore worth of imported components in Rs 100 crore worth of hydraulic pumps that
it supplies Smith Aerospace, the existing offset policy gives Smith Aerospace
offset credit for Rs 20 crore, i.e. the value the IOP has added in India (billed
cost, less cost of imported components). The new proposal changes this
calculation fundamentally by defining value-add as billed cost, less the import
cost incurred by the IOP.

In practice, this would allow Smith Aerospace to generate Rs 100 crore worth
of offset credit through the same transaction, merely by encouraging Jai Bhagwan
Hydraulics to buy the imported components (worth Rs 80 crore) from an Indian
sub-vendor. Though the components remain imported, they would be treated as
value-add, simply because the IOP, Jai Bhagwan, has not imported these (and has,
in fact, paid the sub-vendor in rupees). This would entitle Smith Aerospace to
claim offset credits for the full Rs 100 crore.

This only requires a slight amendment to Para 6.4 of the current Defence
Procurement Procedure of 2011 (DPP-2011). The DAC will discuss this amendment on
June 24. MoD did not respond to questions on the subject.

“Instead of encouraging the Indian defence industry to produce in-country,
this amendment effectively legitimises imports. Instead of the Indian Offset
Partner doing the import, the Tier-2 supplier will do it. The foreign vendor
will get enhanced offset credits without any extra production having taken place
in India,” points out the CEO of an Indian defence company, who has requested
not to be identified.

The new policy also incentivises foreign vendors to select micro, small and
medium enterprises (MSMEs) as their offset partners, by introducing a multiplier
of 1.5 for offsets discharged through MSMEs. That means if Jai Bhagwan
Hydraulics were an MSME (according to the monetary guidelines specified by the
department of micro, small and medium enterprises, the offset credit to Smith
Aviation would be multiplied to Rs 150 crore (Rs 100 crore times 1.5).

Ironically the revised policy will, for the first time, explicitly state that
the offset policy is aimed at developing Indian defence industry. The threefold
aim it specifies is “to leverage capital acquisitions to develop the Indian
defence industry by (i) fostering development of internationally competitive
enterprises, (ii) augmenting capacity for research, design and development
related to defence products and services and (iii) encourage development of
synergistic sectors like civil aerospace and internal security.”

Other changes

The proposed policy would also permit
transfer of technology (ToT) as offsets; granting any foreign vendor a
multiplier of three for technologies specified by the Defence R&D
Organisation (DRDO). It extends by two years the period within which vendors
must discharge offset obligations and extends the validity of banked offset
credits to seven years (it was earlier two years). In complex procurements (like
the recent medium fighter contract) where multiple sub-vendors incur offset
liabilities, the new policy will permit sub-vendors to individually discharge
their respective liabilities, even while holding the main vendor responsible for
discharging offsets in full.

Another amendment being discussed on June 24 could resolve a six-year debate
that has exercised the MoD — which agency should administer offsets? One group,
supported by the army and air force, has argued the powerful Acquisitions Wing
should oversee offsets, since it buys the foreign arms that create offset
obligations. Other bureaucrats apprehend a conflict of interest that might
foredoom offsets, since the Acquisitions Wing’s primary mandate of expeditious
procurement pre-disposes it to regard strict offsets as an encumbrance. This
group argues that as offsets aim at boosting indigenous defence production
capability, they should be handled by the department of defence production
(DDP), a separate MoD wing that is led by a secretary.

MoD sources say the proposal that the DAC will examine gives the Acquisitions
Wing responsibility for concluding offset contracts alongside each procurement
contract. The DDP will, thereafter, oversee the discharge of offsets.

Offsets were first made mandatory in the Defence Procurement Policy of 2006
(DPP-2006) and then revised periodically. The policy requires foreign vendors
who win defence contracts worth Rs 300 crore or more to plough back at least 30
per cent of the contract value into India in the form of defence orders,
technology or infrastructure.

The amendments now proposed continue the MoD’s steady dilution of this
policy. Global arms vendors, backed openly or tacitly by their governments, have
mounted a sustained lobbying campaign against offsets, arguing that Indian
defence players do not have the capacity to absorb the offset production that
will arise. Meanwhile, India’s defence producers have argued that the very aim
of the offset policy is to develop production capacity and, therefore, the
foreign vendors must assist in building up capacities. The MoD, by incrementally
diluting the offset policy, has indicated that it supports the foreign arms
vendors.

Wednesday, 13 June 2012

On
Wednesday, in Washington D.C., the third US-India Strategic Dialogue will be
co-chaired by US Secretary of State Hillary Rodham Clinton and India’s Foreign
Minister SM Krishna.

The US
State Department has announced that the dialogue between “the world’s oldest
and the world’s largest democracies” will include discussions on bilateral and
regional economic issues, regional security and defence, public health, innovation,
agriculture, and women’s empowerment.

While
engagement between Washington and New Delhi has expanded since President
Obama’s visit in 2010, the last year has seen strains over the two countries’
differing approaches to Iran, in particular India’s insistence that its energy
needs demand continued oil imports from Iran, irrespective of US-led sanctions.
However, vocal public disagreement involving the two countries’ media,
legislatures and strategic communities has not prevented the two governments from
deftly bridging the gap.

On
Monday, Clinton granted India (and six other countries) a six-month waiver from
sanctions, justified by the actions they have taken to reduce oil dependency on
Iran. India has reduced oil imports from Iran from the 2008-09 high of 16% of
total oil imports to just 10% last year, with further reductions planned to 7%.
Reducing below this level is problematic because refineries like those of
Mangalore Refinery and Petrochemicals Ltd (MRPL) are engineered specifically
for Iranian crude.

New
Delhi officials, speaking anonymously, say entirely shutting off Iranian crude
would be undesirable, even if Saudi Arabia offered to make good the shortfall.
“We would not like all our eggs in one basket. Besides, we are exploring other
sources: imports of crude from Venezuela have begun; and our traditional
source, Iraq, has begun exporting crude again,” says a senior foreign ministry
official.

Even
at the reduced import levels from Iran, India faces difficulties in making
payment. While it has been agreed that 50% of India’s oil imports will be paid
for in rupees (reassuring to America because that reduces the flow of hard
currency to Teheran), India’s share of the $15-16 billion bilateral trade is a
mere $2.6 billion. Paying in rupees requires India to step up exports to Iran,
but enhancing trade arouses further criticism of India.

“After 28th June, if the US decides to
implement watertight sanctions on the Central Bank of Iran, payments would be
difficult unless we have a larger rupee component, or implement counter-trade,”
says the foreign ministry official.

Within New Delhi’s strategic elites,
India’s relationship with Iran has become a major discussion point. Officials
and analysts inclined towards the US point to Iran’s unpredictability; to
India’s emerging strategic partnership with the US and Israel; and to gulf
states like Saudi Arabia with whom India has longstanding relations, and to the
need to keep the gulf region stable as it has 6.3 million migrant Indian
workers.

The counter view, which is closer aligned
to official policy, sees Iran as an influential player in West Asia that
opposes Sunni extremism; as a potentially crucial Indian ally in stabilizing
Afghanistan, and as a country that provides India a gateway to Afghanistan and
Central Asia through the port of Chabahar.

While many regard the ongoing Iran crisis
as a “west-versus-Iran” confrontation, the longer-term Indian security
perspective envisions a balancing act between Riyadh and Teheran, both
geopolitical rivals in a West Asian power play. They have multiple points of
confrontation: civilizational Arab-Persian tension; Shia-Sunni sectarian
rivalry; radically different approaches towards the west, and different
outlooks to tackling Israel.

“The internal dynamics of the Islamic world
are crucial. If Iran is badly weakened, the fundamentalist, pan-Islamic forces,
which are heavily funded by Wahabbi regimes like Saudi Arabia and others will
gain in vigour,” argued a senior diplomat in a closed-door discussion in New
Delhi last week.

MEA officials have long insisted that
reports of US-India tension over New Delhi’s continuing relations with Teheran
reflected analyst opinion rather than the official bilateral relationship.
Washington and New Delhi, in fact, were understanding of each others’ concerns
and imperatives in dealing with Teheran. That appears to have been verified by
the US waiver on Monday.

The strategic dialogue caps an intense
engagement between Washington and New Delhi over the preceding months. Andrew
Shapiro, the Assistant Secretary of State for Political-Military Affairs,
visited New Delhi in April, followed by Defence Secretary, Leon Panetta this
month. The Us Treasury Secretary, Tim Geithner, is scheduled to visit India on
June 27-28.

Tuesday, 12 June 2012

Few Indo-Pak issues are as emotive as the
Siachen Glacier dispute; a misleading term given that India controls all of
Siachen while Pakistan only hankers for it. Each time Siachen is up for
discussion articles appear in the Indian media, arguing for “demilitarising”
the area in order to “build confidence,” i.e. hand Islamabad a sop that might
evoke corresponding generosity. The Pakistan Army badly wants a troop pullback,
given the comprehensive mauling it has received and the unfavourable positions
it holds. Meanwhile, Indian hardliners argue that, as in Kargil, Pakistan could
backtrack from even a signed agreement, occupying Indian positions after our
army has climbed down.

Today, Siachen is on the table again, with
Pakistan’s influential army pressing for talks after a killer avalanche in the
area buried 127 Pakistani soldiers. And The Hindu, a newspaper that advocates concessions in Siachen, published a
front-page headline story on Sunday entitled “Siachen was almost a done deal
in 1992.” The article, presenting well-known and
widely-documented facts as news, “reveals” that a mutual pullback agreement was
at hand in the 6th round of Siachen talks in Nov 1992, but “the
Indian political leadership developed cold feet,” forcing our negotiators to
pull back from the agreement.

Quoting the head of the Indian delegation,
NN Vohra, who was then the defence secretary, the article reveals that a
scheduled signing ceremony had to be called off overnight, because the Indian
government decided to conclude matters at the next round of talks in January
1993.

Newspapers are entitled to their views,
howsoever unsound. But it is mystifying why well-known events are being
presented as front-page news headlines. In his seminal book, “Siachen:
Conflict Without End”, Lt Gen VR Raghavan, then the
army’s Director General of Military Operations and a key member of the Indian
delegation, has explained why he thinks India’s political leadership changed
its mind: growing differences between the Congress and the BJP over the Babri
Masjid issue made a political consensus difficult; and the political leadership
had second thoughts in view of the violence that Pakistan was instigating in
J&K.

But the Hindu article portrays New Delhi as somehow stabbing Pakistan in the back
by refusing to sign. Surely nobody can argue that a nation cannot reconsider an
agreement up to the time that it actually signs it?

The article incorrectly mentions that, “the
Pakistani delegation offered a proposal that met India’s demand of recording
existing ground positions before withdrawal of troops from a proposed zone of
disengagement.” India has always demanded (and the Indian draft of the
agreement published by The Hindu corroborates
this) that the Actual Ground Position Line (AGPL), which marks the dividing
line between the two armies, be clearly spelt out in the agreement. Pakistan,
however, proposed that the AGPL be buried in an Appendix in the form of a
“redeployment schedule.” In 1992, India’s demand had not been met, but it was
still (unwisely) considering acceding to Pakistan’s request.

The reason this would be unwise is that a
“redeployment schedule” tucked away in an Appendix would never have the
authority of a marked map with a delineated and specified AGPL. It cannot be
forgotten that the only reason the international community, especially the
United States, turned against Pakistan at the time of the Kargil intrusions was
because India could present a signed map, on which the two sides had delineated
the Line of Control (LoC) in 1972.

Furthermore, when the entire 700 km-long
LoC --- extending from Akhnur, near Jammu, to NJ 9842, where Siachen begins ---
has been delineated and marked on a signed map, there is no reason at all for
the 109 km-long AGPL to be marked in any other way. Pakistan argues that the
AGPL was formed due to Indian perfidy (and violation of the Shimla Agreement).
But India is on equally solid ground in arguing that the LoC was formed by
Pakistani perfidy and violation of J&K’s Instrument of Accession to India.

New Delhi must make it clear that Siachen
will never be a handout to Pakistan, or a “confidence building measure” to take
forward the Indo-Pak dialogue. Siachen is a vital part of the Kashmir “core
dispute”; for that reason, it cannot be a mere confidence building measure.

In addition, any Siachen pullback must be
made conditional on a Kargil pullback, where Pakistani perfidy in 1999 forced
the Indian Army to deploy some 20,000 soldiers, in conditions that rival
Siachen, to prevent Pakistani soldiers from violating the LoC again. The Indian
Army has mastered conditions in Siachen; Pakistan clearly has not. The
conditions in Kargil are less favourable to us.

India offers space for all shades of
opinion, including the Wagah candle-lighters who believe that the vicious,
vengeful, self-destructive extremism that spreads alarmingly across Pakistan is
merely a thin crust, beneath which bubbles a wellspring of tolerance,
secularism and democratic liberalism that will burst forth any day, washing away
the evil. The fraternal Indo-Pak functions that these idealists organise do no
harm and, perhaps, a little good. But when this cuckoo lobby pushes to hand
over hard-won territory for “building confidence” with Pakistan, it is time to
push back. The only confidence this will build in Rawalpindi is that New Delhi
has not learnt the lessons of history.

Thursday, 7 June 2012

Leon Panetta, in his first visit to New
Delhi as America’s secretary for defence, flatly declared that the United
States will continue drone strikes against terrorist targets in Pakistan’s
Federally Administered Tribal Areas (FATA), even if Islamabad believed that its
sovereignty was being violated. The strikes were justified, said Panetta,
because the terrorists who killed 3000 Americans on 9/11 continued to take
refuge in FATA.

The statement is significant, given that
President Barack Obama faces attack at home over the legal rationale for drone
attacks on Pakistani soil. A Republican congressman, Dennis Kucinich is leading
a growing movement that questions the administration on the legal basis for
striking targets in a country that the US is not at war with. The Pakistani
media is prominently covering this letter campaign.

Today, addressing an audience of strategic
thinkers in New Delhi, Panetta laid out the administration’s case in detail. “With
regards to drones… this is about our sovereignty as well. Because there were a
group of individuals who attacked the United States on 9/11 and killed 3000 of
our citizens. And we went to war against those who attacked the United States
of America. The leadership of those that were involved in planning those
attacks located (themselves) in Pakistan in the FATA. We have made clear to the
Pakistanis that the United States of America is going to defend ourselves
against those that would attack us. And we have done just that. We have gone
after their leadership and we have done that effectively, targeting Al Qaeda
leadership and terrorists.”

Panetta went on: “The terrorists who
threaten the United States threaten Pakistan as well. This is not just about
protecting the United States; it is also about protecting Pakistan. And we have
made very clear that we are going to continue to defend ourselves.”

Panetta made common cause with India on the
need to stabilize Pakistan. “We can’t have a stable Afghanistan without a
stable Pakistan,” he said. “India views the relationship with Pakistan as
complicated and so do we. And it is… but at the same time, it is a necessary
relationship… it is not easy, but it is necessary.

In contrast to the hard line against
Pakistan, Panetta described India as central to America’s new posture in the
Asia Pacific. “America is at a turning point. After a decade of war, we are
developing a new defence strategy --- a central feature of which is a
“rebalancing” towards the Asia-Pacific region. In particular, we will expand
our military partnerships and our presence in the arc extending from the
Western Pacific and East Asia into the Indian Ocean region and South Asia.”

“Defence cooperation with India is a
linchpin in this strategy. India is one of the largest and most dynamic
countries in the region and the world, with one of the most capable militaries.
India also shares with the United States a strong commitment to a set of
principles that help maintain international security and prosperity.”

During his two-day visit to New Delhi,
Panetta met the prime minister, the national security advisor, and held
delegation meetings with his counterpart, Defence Minister AK Antony. Panetta
says the two sides discussed America’s new focus on the Asia-Pacific; the
transition in Afghanistan and the need for India to continue supporting the
government in Kabul; the India-Pakistan peace dialogue; and issues like piracy,
terrorism, Iran and North Korea.

The Indian Air Force (IAF) purchase of 126
Rafale fighters has made global headlines, and the Indo-Russian Fifth
Generation Fighter Aircraft (FGFA) could be another jaw-dropper. But Indian
military aviation could see an even more prominent growth area in helicopters,
where the defence services are poised to induct well over a thousand rotary
wing aircraft in the coming decade, the majority of them developed and built in
the country.

Already on the anvil for the army, IAF,
navy and coast guard are the following:

The IAF is inducting 139 Russian Mi-17 V-5
medium lift helicopters, for an estimated $2.4 billion. The workhorse Mi-17,
which transports 26 soldiers in combat gear, or 4 tonnes of supplies to high
altitude posts, has been in IAF service for decades, but the new-model V-5 is a
vastly superior machine, with new engines, rotor blades and avionics. An IAF
order for 80 Mi-17s is already being delivered, which is likely to be followed
by an order for 59 more.

Fifteen American CH-47 Chinook heavy lift
helicopters will be bought to replace the IAF’s Russian Mi-26 helicopters, of
which just 3-4 remain serviceable. The Chinook, built by Boeing, has seen
extensive combat, most recently in Iraq and Afghanistan. The IAF has evaluated
the helicopter and is please with its avionics and power, which allows it to
accurately deliver 50 fully equipped soldiers, or a payload of 12.7 tonnes,
onto the roof of a house or the edge of a cliff.

The IAF has also completed trials for the
purchase of 22 medium attack helicopters, and homed onto Boeing’s AH-64 Apache.
Attack helicopters, which operate from close behind the forward troops, provide
immediate fire support --- cannons, rockets and anti-tank missiles --- to
soldiers that encounter the enemy, providing them a battle-winning advantage.
Unlike most other countries, India has chosen not to use attack helicopters in
counter insurgency operations for fear of collateral damage.

The IAF and army have also placed a Rs 7000
crore order for 159 Dhruv Mark III utility helicopters. These have been
designed and built by Hindustan Aeronautics Ltd (HAL), which builds 36 Dhruvs
each year. There is an estimated need for more than 350 Dhruvs for the army,
IAF, coast guard and paramilitary forces.

The navy is buying an additional 50 light,
twin-engine helicopters, most probably from Agusta Westland. The Dhruv does not
meet its needs since its composite rotors cannot be folded up for stowing the
helicopter in a warship’s tight confines.

In addition, the navy is procuring another
91 medium, multi-role helicopters to replace its vintage Sea King fleet, which
flies from larger frigates and destroyers. A global tender is out for 16
helicopters, to which another 75 have been added.

Riding on the Dhruv’s success is HAL’s
Rudra, a heavily armed version of the Dhruv, which carries a cannon, rocket
pods, anti-tank missiles and a full suite of electronic warfare (EW) equipment.
The army and the air force will buy 76 Rudras.

HAL is also developing the Light Combat
Helicopter, of which 179 are on order (IAF 65; army 114). This 5.5 tonne light
armed helicopter features the Shakti engine, the Dhruv’s dynamic components
(main rotor, tail rotor, and the gearbox), and the weapons suite that is being
developed on the Rudra. The LCH will be a high altitude virtuoso: taking off
from Himalayan altitudes of 10,000 feet, firing guns and rockets up to 16,300
feet, and launching missiles at UAVs flying at over 21,000 feet.

The military’s other bulk requirement is
for 384 light utility helicopters, or LUH’s, to replace the army and IAF’s
obsolescent Cheetahs and Chetaks. This has been divided into two streams: 197
LuHs are being bought off-the-shelf through a global tender; and 187 LuHs are
being developed and built in India by HAL. To ensure timely delivery, the MoD
has specified target dates for HAL’s development milestones: building of a
mock-up; the design freeze; the first flight; Initial Operational Clearance,
and so on. Each time HAL misses a milestone its order reduces from 187.

Unlike the IAF’s fixed wing aircraft
acquisition plan that focuses on foreign buys, its rotary wing plan leans
towards indigenisation. This after a strategic assessment in the mid-1990s,
when Ashok Baweja was HAL’s chairman, that indigenisation could be
realistically pursued in the less challenging rotary wing field than in the
cutting-edge realm of fighter aircraft.

This policy drew strength from the
technological breakthroughs of the Dhruv helicopter and the Turbomeca-HAL
Shakti engine. Both these were optimised for high altitude operations up to
20,000 feet, a unique feature in the Indian Army’s operating environment.

P Soundara Rajan, HAL’s helicopter chief,
says the Bangalore-based division will ramp up turnover from the current 10% of
HAL’s turnover to 25% a decade from now. Having taken 40 years to build its
first 700 helicopters, which were basic second-generation machines, HAL aims at
building another 700 fourth-generation within the next 15-20 years.

Monday, 4 June 2012

A dangerous flashpoint in US-India
relations faces visiting US Secretary of Defense, Leon Panetta, who faces tough
questions from Indian officials on Tuesday. The US State Department has slashed
India’s request for Javelin anti-tank missiles, offering instead a smaller
quantity that Washington sources say is “less than half of what India has
requested for.”

Indian MoD officials are furious that
Washington, an avowed strategic partner, has pared down India’s requirement of
Javelin missiles, even while arguing that defence sales are a cornerstone of
the US-Indian strategic relationship.

“This (US reduced offer) is a deal killer.
Washington will not dictate the quantity of weaponry we need. This will
severely damage the prospects of US vendors in future arms contracts,” a South
Block official told Business Standard.

This unexpected rebuff stems from the US
Department of Political-Military Affairs, a State Department office that
examines the political fallout of proposed US arms sales. Pol-Mil Affairs, as
this department is called, often nixes or curtails arms sales because they
might “destabilize the regional military balance.”

Neither the US Embassy in New Delhi, nor
the Ministry of External Affairs, is prepared to reveal the reason provided by
Washington for slashing the Indian request. The MEA and the MoD have not
responded to requests for comments.

US Embassy spokesperson, Peter Vrooman,
said, “We don’t discuss individual sales. Secretary Panetta looks forward to
having an exchange with the Government of India on a broad range of issues.”

Andrew Shapiro, the Assistant Secretary of
State for Political-Military Affairs, had told Business Standard, in an
exclusive interaction during his visit to New Delhi on 17th April,
that Washington had cleared the transfer of technology for manufacturing the
Javelin missile in India. Given that readiness to transfer high-end technology,
the curbs placed by Washington on the missile numbers remains inexplicable.

The FGM-148 Javelin, built by US companies
Lockheed Martin and Raytheon, is one of two anti-tank guided missiles (ATGMs)
that the Indian Army is evaluating for its 350-odd infantry battalions. The
other is the Spike, built by Israeli company, Rafael. These are both
shoulder-launched, “fire-and-forget” ATGMs, which means that they autonomously
track their targets after they are fired by a two-man crew.

Both missiles are scheduled to come to
India for user evaluation trials later this year. However, the Javelin has
already impressed the Indian Army. During joint exercises with the US Army,
Indian missile crews have fired ten Javelin missiles. All ten hit their
targets.

The US industry, which has heavy stakes in
a successful Javelin sale to India, is sharply critical of the State Department
for curtailing the Indian request. “Offering a reduced number of missiles will
almost certainly kill the Javelin deal; in fact it seems to almost be designed
to be so. It seems as if Hillary Clinton herself remains unconvinced about the
India relationship and is trying to set a different tone,” complains an
industry member.

A key US frustration in the defence
relationship has been New Delhi’s refusal to sign three defence cooperation
agreements that Washington has pressed for: a Communications Interoperability
and Security Memorandum of Agreement (CISMOA); a Basic Exchange and Cooperation
Agreement for Geo-spatial Cooperation (BECA); and a Logistics Support Agreement
(LSA). New Delhi believes that signing these agreements would put it overtly in
the US camp, diluting its “multi-aligned” foreign policy that emphasises strong
relations with multiple foreign powers.

There are also growing frustrations in
Washington over India’s resistance to allowing US “end-user” inspections of
weaponry sold to Indian security forces. New Delhi regards end-user monitoring
as a violation of sovereignty.